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Abstract:
El Salvador will choose a new president in a runoff election on March 9. The nation's decision may prove critical to Salvadoran democracy and regional security, in light of substantial evidence linking the ruling party candidate to narcotraffickers, terrorist groups, and violent street gangs. Moreover, foreign interference in the form of billions of dollars in Venezuelan oil revenues has given the ruling party an advantage, despite the fact that its economic policies have increased poverty and stunted economic growth.

Abstract:
The following National Security Outlook is the ninth in AEI's Hard Power series, a project of the Marilyn Ware Center for Security Studies. In it, Dorothée Fouchaux examines the state of French forces and France's most recent effort to prioritize its strategic goals and square them with its military capabilities.1 Certainly since Charles de Gaulle's presidency, France has maintained a tradition of thinking strategically for itself-often, admittedly, to the aggravation of its allies. This tradition remains strong and, if anything, has been reinforced in recent years by the sense that the United States is pivoting away from Europe and would like to reduce its footprint in Europe's troubled periphery. With its latest defense white paper, Paris has laid out a program to maintain its "strategic autonomy" through a combination of nuclear deterrence, enhanced intelligence efforts, and discrete power-projection capabilities. But France faces flat defense budgets, the increased cost of its military interventions in Africa, and prospects that budget shortfalls will not be overcome by the sale of public shares of national defense companies or export sales of military hardware. Consequently, some doubt that an even smaller French force will have sufficient resources to address existing problems in readiness and needed capabilities while sustaining a defense research-anddevelopment base sufficient to keep future French forces armed with advanced equipment. In short, France really is living on the strategic edge.

Abstract:
Since Azerbaijan regained its independence in 1991, it has been only the world's second Shi'ite-led state after Iran. Azerbaijan respects separation of mosque and state, and despite pressure from its neighbors, remains independent from political domination. Given its strategic importance, safeguarding the country's independence remains a US priority. And the threat from Iranian meddling is particularly acute. From Tehran's perspective, the combination of Azerbaijan's pre-19th-century Iranian past, modern Azerbaijan's embrace of secularism, and its relative economic success challenge Iran's legitimacy. As Iranian authorities have sought to undermine and destabilize Azerbaijan through political, clerical, charitable, and media channels, Azerbaijan's counterstrategy has been both restrained and effective.

Abstract:
Every Olympiad is a complex and, until the end, uncertain endeavor. In the case of the 2014 Winter Games, which begin February 7 in Sochi, Russia, the challenges and vulnerabilities are far more significant and numerous than usual. It will be the first (and almost certainly the last) Winter Games in the subtropics. Virtually the entire infrastructure had to be built from scratch and in haste, with abuse of laborers and corruption overhead likely further compromising the construction. While various interest groups exploit every Olympiad to draw international attention to their causes, protests in Sochi could be particularly intense. Finally, and most ominously, Sochi is next door to a fundamentalist Islamic uprising in which terrorism claims victims almost daily. For the sake of the athletes and millions of fans, one hopes that none of these potential problems will precipitate a disruption, much less a crisis or bloodshed. Yet in their choice of location and the manner in which they have gone about organizing the Games, the Russian authorities have greatly increased that risk. By highlighting some key features and practices of Vladimir Putin's regime, a major setback at the Olympiad could deal a serious blow to the regime's legitimacy, prompt national soul searching, and trigger another round of civil resistance in search of reforms.

Abstract:
New data published in the American Enterprise Institute-Heritage Foundation China Global Investment Tracker show that China continues to invest heavily around the world. Outward investment excluding bonds stood at $85 billion in 2013 and is likely to reach $100 billion annually by 2015. Energy, metals, and real estate are the prime targets. The United States in particular received a record of more than $14 billion in Chinese investment in 2013. Although China has shown a pattern of focusing on one region for a time then moving on to the next, the United States could prove to be a viable long-term investment location. The economic benefits of this investment flow are notable, but US policymakers (and those in other countries) should consider national security, the treatment of state-owned enterprises, and reciprocity when deciding to encourage or limit future Chinese investment.

Abstract:
The following National Security Outlook is the eighth in AEI's Hard Power series-a project of the Marilyn Ware Center for Security Studies that examines the state of the defense capabilities of America's allies and security partners. In it, Andrew Michta outlines the case of Poland, which he notes is determined both to expand its indigenous defense industrial capabilities and to increase overall defense spending. As numerous accounts of NATO defense trends over the past two decades elucidate, Poland's decision to increase defense spending is far more the exception than the rule when it comes to America's other major allies. This is largely driven, according to Michta, by Poland's desire to fend as much as it can for itself in light of what it sees as Russian revanchism and Washington's growing disengagement from Europe in defense matters. Not surprisingly, this has led to a shift in Warsaw's security agenda since Poland joined NATO in 1999. Despite Poland being one NATO ally that has responded positively to Washington's calls for increasing defense capacities, today Warsaw increasingly feels compelled to look to its own resources and to neighboring capitals as potential security partners. Whether this drift in transatlantic ties is permanent or inevitable remains an open question, and will to a large extent depend on how US security relations with Europe develop in the coming years.

Abstract:
The Pentagon has been undergoing major procurement reform since 1984, but hoped-for results have not been achieved. Bipartisan acquisition reform legislation was passed in the 1990s, but these positive changes did not hold. At the heart of the current procurement dilemma is too much faith in central planning and too little faith in the free market. Policymakers must first remedy the incentives underlying reform, and five overarching categories are driving the misplaced incentives: trust in central planning leading to increased bureaucracy, preference for defense-unique versus commercial solutions, distrust of the defense industry and profit motives, fear that the workforce is incapable of exercising discretion, and finally, preoccupation with cost certainty and maintaining low prices over achieving results and value. By reaching out to and incentivizing the private sector, the Pentagon can help reform the procurement system by lowering costs, restoring competition, and delivering taxpayers the best value for their money.

Abstract:
South Korea is in a unique position. It is an economic powerhouse and a thriving democracy that faces the most ­ominous and imminent threat on its borders of any democracy in the world. Moreover, this is a threat that continues to evolve, with increasing missile, cyber, special operations, and nuclear capabilities and a new leader who shows no signs that he will be any less ruthless or belligerent than his father. To meet this threat, Seoul has undertaken a number of efforts to better deter and defend against North Korean capabilities and provocations, including increasing the defense budget, upping training with US forces, creating new command elements, and establishing plans for preemptive strikes against imminent North Korean missile launches. However, in part because of administration changes in Seoul, the South Korean effort has been uneven. And decisions remain to be made in the areas of missile defense, tactical fighter aircraft, and command-and-control arrangements that will be significant for not only South Korea but all states that have an interest in Northeast Asia's peace and stability.

Abstract:
The Persian Gulf states of Oman, Qatar, and the United Arab Emirates (UAE) have largely been immune to the rising tide of sectarianism that has rocked the Middle East in the wake of the Arab Spring. The three monarchies have successfully integrated their Shi'ite minority populations into their countries' sociopolitical and economic spheres, giving those populations little reason to engage in violence or seek political guidance from Iran or Iraq. Omani, Qatari, and Emirati Shi'ites strongly identify themselves as citizens of their respective countries and remain loyal to their ruling regimes. However, the spillover effects of the Syrian civil war—a sectarian conflict between the Shi'ite Iran-Hezbollah-Assad axis and the opposition groups backed by regional Sunni governments—are threatening Sunni-Shi'ite stability in the UAE, Qatar, and to a lesser degree, Oman. The United States should help maintain harmony in these states by reaching out to independent Shi'ite business communities and by working with regional leaders to ensure equal citizenship, political rights, and religious freedom among minority populations.

Abstract:
The 2008–09 financial crisis demonstrated that gas and oil exports could no longer serve as Russia's engine of economic progress and the source of a steady rise in personal incomes. Russia needed to dramatically change its investment climate through deep institutional reforms that would boost economic liberty, expand the rule of law and property rights, diminish corruption, and create more political choices for its citizens. Such reforms are all the more urgent now as Russia's economy is slowing to a crawl and trust in President Vladimir Putin is steadily declining. Yet the Kremlin has chosen to address these challenges with authoritarian consolidation, buying short-term stability at the expense of the country's longer-term prosperity and progress. Elements of the Kremlin's massive propaganda campaign include militarized patriotism and patriotic education; a selective recovery of Soviet symbols and ideals; the ultraconservative Russian Orthodox Church as the moral foundation of the regime; the promotion of a culture of subservience; and the intimidation, stigmatization, and repression of civil society and its vanguard, nongovernmental organizations. Yet instead of producing the consolidation and unity expected by the Kremlin, this campaign may yield polarization, radicalism, and violence that will prevent the country's peaceful and inclusive transition to a more dignified version of citizenship.

Abstract:
The "grand narrative" of German security policy since the end of the Cold War has oscillated between Germany's reluctance to use hard power and Germany's desire to be seen as supportive of its American and European allies. This is reflected in the varying decisions it has made during foreign military operations and in the manner in which Germany's military has conducted those operations. At the same time, the German military has undergone a series of reforms designed to modernize German forces and to make them more flexible and deployable. But a stagnant and low level of defense expenditures has made carrying out these reforms an ongoing challenge to the German military and German defense ministry. Germany has a vital interest in a stable and liberal international order and, hence, in having a military capable of helping maintain that order. As Europe's leading economic power and, increasingly, as Europe's central political actor, Germany could and should take the lead in reversing the precipitous decline in European hard power.

Abstract:
As stepped-up counternarcotics policies in Colombia and Mexico have increased pressure on regional drug trafficking networks, organized crime syndicates have relocated operations to Central America, where law enforcement agencies and institutions are ill-equipped to withstand the onslaught. These multibillion-dollar gangs are making common cause with some local politicians who are following a playbook honed by Hugo Chávez in Venezuela. The result in Venezuela was the birth of a narcostate, and similar dramas are playing out in Central America. Like Chávez, caudillos are using the democratic process to seek power, weaken institutions, and undermine the rule of law—generating turmoil that accommodates narcotrafficking. Making matters worse for Honduras is that left-wing activists abroad, in support of ousted president and Chávez acolyte Manuel Zelaya, are waging a very public campaign of outlandish claims seeking to block any US assistance to help the Honduran government resist the drug cartels. It is imperative that US policymakers vigorously support democracy, the rule of law, and antidrug programs in Honduras.

Abstract:
Despite the North Atlantic Treaty Organization (NATO) taking its name from the ocean that ties Canada and the United States to their European allies, for most of NATO's history the alliance focused primarily on land power. However, with continental Europe at peace, the drawdown in Afghanistan, the rise of general unrest in North Africa and the Levant, and the American intent to pivot toward Asia, questions are increasingly arising about the capabilities of NATO's European navies to project power and sustain operations around their eastern and southern maritime flanks. These questions have grown even more urgent in the wake of those same navies' uneven performance in the 2011 military campaign against Muammar Gaddafi's Libya. Examining the major navies of America's European allies reveals a general desire, with the exception of Germany, to maintain a broad spectrum of naval capabilities, including carriers, submarines, and surface combatants. But given the significant reduction in each country's overall defense budget, procuring new, sophisticated naval platforms has come at the cost of rapidly shrinking fleet sizes, leaving some to wonder whether what is driving the decision to sustain a broad but thin naval fleet capability is as much national pride as it is alliance strategy.

Abstract:
Like many other Western states, following the Cold War, Australia cut its defense budget, resulting in significant shortfalls in key military capabilities. Since the mid-1990s, successive Australian governments have outlined plans intended to boost the capabilities of Australia's armed forces. However, these strategic ambitions have in recent years been undercut by changes in government spending priorities and shortfalls in the national budget, jeopardizing the long-standing technological advantage Australian forces have enjoyed over other states in the region. As major Asian states such as China continue to grow their economies and modernize their armed forces, Australia must commit sufficient resources to its modernization agenda or risk losing its ability to help shape the Asia-Pacific ­security environment and risk fulfilling its role as a key US partner in America's pivot to Asia.

Abstract:
For decades the Kingdom of Saudi Arabia has been America's indispensable ally in the Middle East, and the ­Kingdom's stability remains vital for US strategic interests in the region. While antigovernment protests in the Kingdom's Sunni-majority regions have been small and sporadic in the wake of Arab Spring, there has been an unremitting unrest in the strategic Eastern Province, home to Saudi Arabia's marginalized Shi'ite minority and major oil fields. As in the 1980s, if government repression and discrimination push the Shi'ites to extremes, some may resort to violence and terrorism, jeopardizing American interests in the region, benefitting Iran and ­al-Qaeda, disrupting the equilibrium of global oil markets, and adversely affecting economic recovery in the West. To ensure lasting stability in the Kingdom, the United States must work with the Saudi government to achieve gradual but meaningful reforms that include integrating the Shi'ites into the Kingdom's sociopolitical system.

Abstract:
Kuwait is perhaps America's closest Arab ally; it remains the only country in the Middle East on whose behalf the United States went to war. Although the Islamic Republic of Iran has at times tried to leverage Kuwait's large Shi'ite minority against the Kuwaiti state, it has mostly been unsuccessful. Indeed, Kuwait's Shi'ite ­community has repeatedly worked to prove its loyalty to Kuwait. Recent political instability, however, is again opening the door for sectarian forces to undermine Kuwait and, by extension, an important pillar of US defense strategy.

Abstract:
The array of postbubble stresses and uncertainties identified in the January 2010 Economic Outlook (“The Year Ahead”) promised that the new year would see plenty of volatility in markets. That is exactly what is playing out as we move through the first quarter. As risks accumulate, it may be that 2010 is shaping up as a mirror image of 2009, reversing last year's down-then-up pattern with an up-then-down pattern this year.

Abstract:
Market conditions in the United States, Japan, China, and Europe portend a weakening global economy. While not dramatic in any one region save an earthquake-burdened Japan, these conditions could accumulate to create a problematic loss of momentum for global growth, especially compared to current upbeat consensus views for the second half of 2011.

Abstract:
National security is neither a "sacred cow" nor just another federal budget line item. Providing for the common defense of the American people and our homeland is the primary responsibility of policymakers in Washington. However, in an effort to protect social entitlements like Medicare, Medicaid, Social Security and the health care reform law from serious deficit and debt reduction efforts, President Obama has proposed not only to raise taxes, but also to cut another $400 billion more from future national security spending. As Obama said on June 29, 2011, "[Outgoing Secretary of Defense] Bob Gates has already done a good job identifying $400 billion in cuts, but we're going to do more."

Abstract:
Over the past year, actions by the People‘s Republic of China (PRC) have called into question its previous assertions that its rise to great-power status would be peaceful. Whether it was scolding countries around the world about the Nobel Peace Prize awarded to Chinese dissident Liu Xiabo, declaring that its ?core interests? now included some 1.3 million square miles of the South China Sea, dismissing complaints of neighbors as failing to recognize that "China is a big country," ignoring North Korean acts of terror, challenging U.S. naval ships on the high seas, creating new confrontations with Japan over disputed islands, slashing its export of rare earth elements, continuing cyber attacks on American defense and commercial entities, or testing a new stealth fighter during the visit of the American secretary of defense, the picture that emerges is of a China that believes it can now throw its considerable economic and military weight around. It‘s a challenge that the U.S. has been slow to meet and, as a result, led to considerable uncertainty among friends and allies about whether the U.S. is up to that challenge—uncertainty fed in no small measure by prospects of a declining American defense budget.

Abstract:
The future of America's national security hangs in the balance. Facing a looming Thanksgiving deadline, a select bipartisan panel of 12 lawmakers is struggling to hammer out legislation that would reduce the federal deficit by more than $1.2 trillion over the next 10 years. However, it remains unclear if they will succeed.

Abstract:
January ended on a note of diminished hope for a sustainable global recovery as stock markets retreated from their midmonth highs. Since mid-February, however, higher hopes for a sustainable global recovery have returned. Equity markets have rallied along with markets for corporate and global sovereign bonds. Some mitigation of perceived risks facing global investors has provided a chance for hope to “float up,” and it has done so. Tension over the cohesion of the European Monetary Union and, in particular, concerns over a possible sovereign-debt default by Greece have eased, and investors continue to hope that the debt problems in Greece will not spread to the rest of Europe.

Topic:
Economics, International Political Economy, International Trade and Finance, Markets, Financial Crisis

Abstract:
February always brings with it the president's proposals for taxing and spending in the coming fiscal year. The president's budget proposals are accompanied by congressional and administration estimates of the path deficits and government debt are expected to take in coming years. Last year, those projections, especially a three-year string of actual and projected deficits over a trillion dollars from 2009 through 2011, excited widespread comment and handwringing about runaway deficits and their allegedly damaging effects in the form of lower growth, higher inflation, and higher interest rates.

Abstract:
We can expect 2010 to be a volatile year. This likelihood is underscored by looking back at 2008 and 2009. Two thousand eight was a highly volatile year leading up to the collapse of Lehman Brothers in September, which was followed by the risk of a total systemic meltdown. That sharp and obvious risk spike prompted massive policy responses that were simply the largest that central banks, with rate cuts and liquidity provision, and governments, with tax cuts and spending increases, could manage. The result—beginning in March 2009—was a linear rise in the prices of risky assets, the result of massive relief once the slip into a global depression had been averted and the acute phase of the crisis in the financial sector had passed.

Abstract:
How might recess appointments to the National Labor Relations Board (NLRB) affect federal labor law? Controversial appointee Craig Becker is known for advocating policies that fall outside the mainstream view of labor laws. Although the views of one member of the NLRB will not automatically translate into dramatic policy changes, concerns that members of the NLRB may rewrite important principles of federal labor laws through litigation are not unfounded. Whether President Barack Obama's NLRB would be able to enact key provisions of the Employee Free Choice Act through litigation rather than congressional action remains to be seen.

Abstract:
Since the end of the Cold War, administrations of both political parties have underfunded the military, first harvesting a "peace dividend" by reducing the size of the force and then repeatedly postponing investments needed to replace worn out equipment and preserve the technological advantages that have been a traditional source of American strength. Now, just as this strain on the military--engaged in today's persistent irregular wars, yet unable to prepare fully for the wars of the future--reaches a point of crisis, come new calls to cut the Defense Department's budget, amplified by the fears of a faltering economy, the federal government's desire to boost spending elsewhere, and its inability to rein in other spending. Yet the arguments frequently made for Pentagon spending cuts are concocted from a mix of faulty analysis and out-of-context "facts."

Abstract:
On December 16, 2008, Federal Reserve chairman Ben Bernanke exercised decisive leadership at a watershed meeting of the Federal Open Market Committee (FOMC). In its official statement after the meeting, the committee pledged to “employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” The pledge to preserve price stability was not a commitment to fight inflation, as is typical, but a highly unusual commitment to fight deflation.

Abstract:
The global financial and economic crisis that emerged in August 2007 has entered a dismaying fourth phase. The January 17–18, 2009, weekend edition of the Financial Times, which has been a major chronicler of the crisis and its many aspects, laid out a frightening timeline of an accelerating and intensifying oscillatory cycle of crisis and failed policy response that started just fifteen months ago. Each phase begins with a shock and ends with a seemingly decisive policy measure meant to contain or “fix” the crisis. Each phase is shorter than the previous one and culminates in a much larger policy response. Throughout the crisis, the losses of financial institutions have steadily grown at an accelerating pace as the underlying conditions in the financial sector and, since September 2008, in the underlying global economy deteriorate more rapidly. Such a disturbing pattern must be truncated by a large, coordinated global policy response to arrest the accelerating erosion of the market capitalization of multinational banks and insurance companies that has resulted.

Abstract:
As the global financial and economic crisis has grown increasingly dire—the deterioration just since the November U.S. election is breathtaking—market participants and policymakers alike have looked to three past crisis models as part of an intensifying search for ways out of the current crisis. First, the Great Depression of the 1930s is being examined ever more closely for possible lessons now that commentators have moved past an under- standable reluctance to mention that experience as relevant to today's situation. Second, the Scandinavian financial crisis of the early 1990s, which included a proactive move toward bank nationalization by the Swedish government, is also widely discussed. Finally, many allusions have been made to the disquieting parallels between today's U.S. experience and that of Japan during its “lost decade” (1991–2001) of recession and deflation, especially after 1998.

Abstract:
On March 18, Federal Reserve chairman Ben Bernanke intensified the important battle against global deflation with a commitment to expand the Fed's balance sheet by an extra $1.15 trillion. With some luck and persistence, that step could boost growth by a percentage point or more and, even more important, substantially reduce the risk of deflation.

Abstract:
Canadians have much to celebrate concerning their natural environment. Over the past 30 years, Canada's air and water have become cleaner, ecosystems and timberlands have been preserved, and soils that feed not only Canadians but also many others around the world have been protected. This has happened while Canada's population and economy have grown strongly, which has propelled Canada, a country of only 33 million, to the status of an economic powerhouse with a standard of living that is the envy of much of the world. There is still more that can be done, but Canada is well on the way toward environmental sustainability.

Abstract:
AEI's environmental team has been especially busy lately responding to numerous press inquiries about the “Climategate” scandal. We reprint below two pieces, one by Steven F. Hayward that appeared in The Weekly Standard, and another by Kenneth P. Green, which appeared on The American. Hayward's piece was mentioned prominently on Fox News Sunday. Green also testified on the science of global warming recently before the Senate Committee on Finance. In addition, Samuel Thernstrom and Lee Lane, who are codirecting AEI's Geo engineering Project, have been following the developments and commenting on them. AEI released an updated version of its Public Opinion Study “Polls on the Environment and Global Warming,” which shows that, even before the latest controversy, opinion about the seriousness of global warming had declined sharply in several recent polls.

Abstract:
Congressional mismanagement of Medicare is a bipartisan project in which Democrats and Republicans set aside the rancor of party politics and ideological differences and work hand in hand to run the program into the ground. The latest attempts to "fix" physician payments by replacing a sizeable cut in Medicare fees with a small increase provide the evidence.

Abstract:
In 1988, as he was about to step down as president, Ronald Reagan received the Francis Boyer Award, AEI's highest honor. He chose for the theme of his speech that December evening, eleven months before the Berlin Wall fell, the struggle of people everywhere for freedom. In his speech, he anticipated the momentous events that would occur in 1989: “So while our hopes today are for a new era, let us remember that if that new era is indeed upon us, there was nothing inevitable about it. It was the result of hard work—and of resolve and sacrifice on the part of those who love freedom and dare to strive for it.” Freedom works, he said. He saluted the Solzhenitsyns, the Sakharovs, and the Sharanskys, saying, “We have seen the thrilling spectacle of mankind refusing to accept the shackles placed upon us.” As we recall the events of November 1989, it is important to remember the struggle and to recommit ourselves to the hard work of extending freedom to those who have yet to enjoy its blessings.

Abstract:
AEI senior fellow Irving Kristol—godfather of the neoconservative movement and one of the towering intellectual figures of the twentieth century—died peacefully on September 18 at the age of eighty-nine. Mr. Kristol's connection to AEI began long before he became a full-time scholar at the Institute in 1988. In 1973, he gave the first of AEI's Distinguished Lectures on the Bicentennial of the United States. The lectures were delivered at historic sites around the country, and Mr. Kristol's lecture, “The American Revolution as a Successful Revolution,” was given at St. John's Church in Washington, where many of the nation's presidents have worshipped. We reprint excerpts from it below after a tribute to him written by Christopher DeMuth, the D. C. Searle Senior Fellow at AEI.

Abstract:
One year ago, on September 14, Lehman Brothers declared bankruptcy. The next day the Dow fell five hundred points. Soon thereafter, the government essentially nationalized AIG, made Goldman Sachs and Morgan Stanley into bank-holding companies, and petitioned Congress for aid. In early September, Fannie Mae and Freddie Mac had been placed in government conservatorship. These events followed the bursting of the housing bubble. We present here three essays written by AEI scholars in the spring and summer of 2009 on the origins of the financial crisis whose reverberations we continue to feel today. Vincent R. Reinhart sets the stage by reminding us of the importance of getting the story of what happened right, as policy recommendations flow from our understanding of what occurred. He also tells us that “the narrative first written about the Great Depression was wrong in many important respects.” John H. Makin and Peter J. Wallison focus on the misguided policies that contributed to the crisis. In a new Economic Outlook, Makin discusses three important lessons of the financial crisis that should be understood in order to enable a faster, more effective policy response to future crises.

Abstract:
China's economic statistics have become the envy of the world. On July 15, China reported a 7.9 percent growth rate for the second quarter of 2009 compared to the same period a year earlier. Meanwhile, China's stock markets are on fire, and its property markets are heating up fast as well. Shanghai's two stock markets are up 75 percent and 95 percent respectively so far this year. The more widely traded Hong Kong Index is up 27 percent, a stellar performance compared to largely flat stock markets in the United States, Europe, and Japan. In even stronger contrast, Russia, which is one of China's emerging-market peers, has seen its economy drop by 10.1 percent during the first half of this year, while its stock market has struggled as well.

Abstract:
Governor Zhou Xiaochuan's comment is an open acknowledgement that the “adverse feedback loop,” in which financial-sector problems hurt the real economy, which in turn intensifies negative conditions in finance, has hit China hard. China's real growth rate, which peaked at 13 percent in 2007 and is heavily dependent on exports, plunged to 6.1 percent on a year-over-year basis in the first quarter of 2009. Nominal growth, a measure of the current money value of goods and services, fell even more sharply, from 21.4 percent in 2007 to 3.6 percent in the first quarter of this year. The fact that the nominal growth rate is 2.5 percent below the real growth rate suggests that, at least as far as output is concerned, deflation has taken hold at a 2.5 percent rate in China.

Abstract:
A new truth of geopolitics has emerged during 2009. It is that the complex and rapidly evolving Sino-American relationship has become the most important bilateral relationship either country has. To this observation, made recently by William C. McCahill Jr. in the November 13 special issue of The China Report, must be added another claim: the course of the Sino-American relationship in both the economic and the political spheres will play a growing role in determining the levels of global economic and geopolitical stability. Trips like President Barack Obama's three-day visit to Shanghai and Beijing November 15–17 will probably be made with increasing frequency in coming years.

Topic:
International Relations, Foreign Policy, Diplomacy, International Political Economy, International Trade and Finance, Bilateral Relations

Abstract:
The recent steps by the Federal Reserve to preempt deflation have—ironically and unexpectedly— prompted a surge in inflation fears both inside the United States and abroad, especially in China. Specifically, the Fed's measures to go beyond the stimulus inherent in a zero percent federal funds rate by purchasing Treasury and mortgage securities has conjured visions—especially in the eyes of major buyers of Treasury securities, China foremost— of massive money printing to underwrite trillions of dollars of additional government borrowing at low interest rates. As markets have shown, if that were the Fed's intention—which it decidedly is not—the effort would fail because excessive money printing—creating a money supply larger than the quantity of money demanded— would push up interest rates as inflation expectations rose.

Topic:
Economics, International Political Economy, International Trade and Finance, Monetary Policy

Abstract:
More than two years have passed since the U.S. housing bubble burst. That event ushered in a financial crisis that was not only intense but also stunning. So stunning in fact, that in August of last year, just a month before the collapse of Lehman Brothers, the global economy was close to a crisis worthy of comparison with the Great Depression, yet neither the markets nor the Federal Reserve had much of an inkling of what was to come. The Standard and Poor's (S) 500 Index had come down to about 1,300 from its October 2007 high of 1,576. Positive growth had just been reported for the U.S. economy during the second quarter of 2008 at an annual rate of 2.8 percent (later revised down to 1.5 percent). Almost one percentage point of that growth came from U.S. consumption, and government spending also contributed. The wave of relief after the Bear Stearns scare in March 2008 had provided a nice boost to the economy and to markets. That boost was further enhanced by the substantial contribution to growth from net exports (2.9 percentage points) thanks to what was, then, continuing strength in the global economy, especially in China, which had reported blistering 10.1 percent year-over-year growth in the second quarter of 2008. These and other positive components more than offset a drag from inventories and residential investment. In short, the real economy had not shown much evidence of damage emanating from the chaos that was churning in the financial sector.

Abstract:
The only thing scarier than the slide of the dollar, which has dropped by 15 percent since March, would be an attempt by the Federal Reserve to stop it. Such an attempt would show that we have learned nothing from the Bank of Japan's disastrous premature exit from a zero-interest policy in August 2000. Closer to home, it would resemble the Fed's premature move to mop up “excess” reserves by doubling reserve requirements in three steps between August 1936 and May 1937, which was followed by the third-worst recession of the twentieth century, from May 1937 to June 1938.

Topic:
Economics, International Political Economy, International Trade and Finance, Monetary Policy, Financial Crisis

Abstract:
Wall Street is dancing again to the music of a sharp rise in stock prices. The question that remains is whether Main Street, currently languishing in a sad world of job losses, unavailable credit, and weakened balance sheets, will get to join the party. To put the question more precisely, will the “adverse feedback loop” that saw a financial collapse last fall that crushed the real economy work in reverse, so that a financial bounce boosts the real economy in coming quarters? The jury is still out on this important question.

Abstract:
Now that Wall Street and the Federal Reserve have finished congratulating themselves for not having been alarmists—in other words, for failing to recognize that a recession was looming—they are now facing up to the onset of a U.S. recession and a rapidly spreading financial crisis. Having been late to reach that conclusion, they now grudgingly admit that we may have a brief "V-shaped" recession and are apparently hoping that Fed rate cuts and a fiscal stimulus package will quickly solve the economy\'s problems.

Abstract:
Japan experienced a disastrous decade of economic stagnation and deflation from 1991 to 2001 after bubbles in its stock market and land market collapsed. While some economic pain was unavoidable—given a 60 percent plunge in equity prices between late 1989 and August 1992, accompanied by the onset of what ultimately became a 70 percent drop in land values by 2001—the "lost decade" was not an inevitable outcome. It required a series of persistently wrong economic policy decisions that ignored the lessons learned in America's Great Depression of the 1930s and the subsequent research on the causes of that painful period.

Abstract:
In October 1907, J. P. Morgan stemmed a financial panic by coercing other banks to join him in providing credit to Wall Street brokerage firms teetering on the edge of bankruptcy.[1] This year, over the weekend including March 15—the ominous Ides of March—James Dimon, head of JPMorgan Chase, was the one to act. With the Federal Reserve squarely behind him and assuming the risk, he prevented a Bear Stearns bankruptcy by agreeing to purchase the firm, providing it with a decent burial, at a price of $2 per share. Bear Stearns's stock had been valued at over $160 per share just a year ago. The $2 price virtually wiped out the value of that stock, one-third of which is owned by its 14,000 employees. This was clearly not a bailout for Bear Stearns shareholders, and whether or not the steps taken by the Fed on March 16 were sufficient to arrest a further collapse of available credit and the economy remains to be seen. As long as house prices keep falling, the underlying problem for credit markets and the economy remains.

Abstract:
The desire to enhance and store wealth has been present ever since income rose above subsistence levels. In ancient times, prior to the creation of symbolic financial claims on wealth, wealth storage was, quite literally, the storage of intrinsically valuable articles in temples, pyramids, or other such formidable structures. Even today in Tibet, which was long a theocracy, a major repository of wealth can be seen in religious statues of solid gold resting in temples.

Abstract:
The bursting of every bubble is followed by statements suggesting that the worst is over and that the real economy will be unharmed. The weeks since mid-March have been such a period in the United States. The underlying problem—a bust in the residential real-estate market—has, however, grown worse, with peak-to-trough estimates of the drop in home prices having gone from 20 to 30 percent in the span of just two months. Meanwhile, the attendant damage to the housing sector and to the balance sheets tied to it has grown worse and spread beyond the subprime subsector.

Topic:
Economics, Government, International Trade and Finance, Political Economy

Abstract:
The Fed is in a bind, pulled toward easier monetary policy by a weak economy and fragile credit markets, while simultaneously needing to resist higher inflation. On Monday, June 9, after a weekend of headlines regarding a half-percentage-point rise in the unemployment rate, Federal Reserve chairman Ben Bernanke gave a pathbreaking speech entitled "Outstanding Issues in the Analysis of Inflation" at the Federal Reserve Bank of Boston's fifty-third Annual Economic Conference. In that speech, after suggesting that the risks of a substantial economic downturn had diminished over the past month and citing further progress in the repair of financial and credit markets, he proceeded to address the problem of rising inflation. In two sentences, he contributed to a sharp, fifty-basis-point rise in two-year bond yields and boosted the market's assessment of the chance of a fifty-basis-point rise in the federal-funds target rate at the September 16 meeting of the Federal Open Market Committee (FOMC) from virtually zero to nearly 70 percent.

Abstract:
Drug abuse and related crime claim nearly thirty-five thousand American lives and sap $180 billion from our economy every year.1 Although the United States is understandably preoccupied with the threat of Islamic terrorism, it must never let down its guard against the well-financed, bloodthirsty, illicit drug cartels that exact a staggering price on our well-being and economy. President George W. Bush's fiscal year 2009 budget proposes to spend well over $14 billion for federal programs to suppress demand and attack supply. Because most cocaine and heroin find their way to the U.S. market through Mexico, it is essential that Mexican authorities confront the illegal drug syndicates whose cross-border crime threatens both countries. The Mérida Initiative—named for the Yucatan city where Bush, then-president of Guatemala Óscar Berger, and Mexican president Felipe Calderón met in March 2007—proposes to make a $1.4 billion multiyear U.S. contribution to support Mexican law enforcement and judicial reforms in their antidrug efforts. The challenges are formidable: Mexico's relatively weak judicial institutions are hard-pressed to take on these well-heeled gangsters on their own, and both sides are protective of their national sovereignty. Nevertheless, both countries have signaled their commitment to this cause: at a February 7, 2008, hearing, the Drug Enforcement Agency's chief of intelligence, Anthony Placido, praised the tangible measures being taken and sacrifices being made by Mexico today and urged skeptical U.S. lawmakers to seize the opportunity to cooperate with Mexican allies against a common foe. Despite heavy media focus on the counternarcotics elements of the initiative, when the specifics of the initiative are examined, it is clear that its aim is to strengthen Mexico's security institutions, enabling them to deal with the threat nonstate actors—be they terrorists, organized crime, criminal gangs, or domestic radical groups—pose to the country's security.